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Monday, 20 October 2014

WeHope

Valuing Tencent’s chat app remains an act of faith

Putting a value on WeChat remains an act of faith. Internet giant Tencent has shed some light on its popular messaging and social media service. But sparse details on costs and regulatory risks make future growth and earnings potential hard to pin down. Valuations are still largely based on hope.

For the first time, Tencent has revealed user metrics and revenue for WeChat, which combines mobile messaging, social media, games and payments. The platform had 355 million monthly active users at the end of 2013, and generated between $32 million to $49 million in revenue in the fourth quarter. While this is tiny compared to the $1.9 billion in revenue the tech giant made from games and selling stickers and other services to its users in the same quarter, it is encouraging for an app that only started to generate income in the final three months of last year.

The figures suggest that WeChat is becoming more than a clone of WhatsApp, the messaging service Facebook bought for $19 billion in February. Though WhatsApp has more users, its only source of revenue to date is the $1 a year it charges established users. Details on costs, meanwhile, remain equally scant for both services. Tencent reported selling and marketing expenses of $920 million in 2013, up 90 percent from the previous year. Though it’s not clear how much of that is associated with WeChat, the company previously said it was splashing out $200 million for an overseas marketing campaign featuring soccer star Lionel Messi.

The land grab may make sense given Tencent’s plans to turn WeChat into a conduit for e-commerce and financial services. But this expansion also brings regulatory risks. China’s central bank recently suspended a mobile payment system, indefinitely delaying Tencent’s planned launch of digital credit cards. Authorities are now also considering limiting the size of mobile payment transactions.

The messaging hype has helped push Tencent’s market value to $136 billion. But comparisons with WhatsApp rest on the questionable assumption that Facebook’s offer was based on some sort of financial logic. For investors trying to guess at WeChat’s potential, only a leap of faith will do.

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Context News

Gaming and social media giant Tencent reported revenue of 17 billion yuan ($2.8 billion) for the fourth quarter of 2013, a 9 percent increase on the previous quarter. Earnings increased 1 percent quarter-on-quarter to 3.9 billion yuan.

Selling and marketing expenses rose 39 percent quarter on quarter to 2 billion yuan, equivalent to 12 percent of total revenue, the company reported. Last year, Tencent hired soccer star Lionel Messi to promote WeChat abroad, budgeting up to $200 million in overseas marketing, according to Reuters.

Tencent’s mobile messaging and social media platform, WeChat, generated revenue of 200 million to 300 million yuan ($32 million to $49 million) in the fourth quarter, Tencent president Martin Lau told reporters. It was the first time Tencent has revealed any financial information about WeChat, which is called Weixin in China.

As of December 2013, the platform had 355 million monthly active users, a 121 percent increase from the previous year.

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